NOTE
IS THE LIMITED LIABILITY PARTNERSHIP NOW THE ENTITY
OF CHOICE FOR DELAWARE LAW FIRMS?
I. INTRODUCTION
Law firms operate and interact today in an increasingly litigious
society,' and the threat of vicarious liability to which partners are often
exposed due to the misconduct of fellow attorneys is no longer theoretical. 2
In the aftermath of the savings and loan crisis of the late 1980i, many of the
law and accounting firms that represented the failed financial institutions
faced massive judgments totaling in the billions of dollars
The first limited liability partnership (LLP) statute enacted in Texas
in 1991 was a reaction to the increasing trend of malpractice claims against
professionals.4 Although this statute did not provide protection for the firm
itself against professional malpractice claims, it did prevent these types of
claims from being satisfied out of the personal assets of innocent partners.5
In 1993, Delaware adopted legislation that permitted businesses to
form LLPs, making Delaware the third state to enact such a statute.6
Although professionals were not restricted in their ability to organize under
the LLP form, as in some states, attorneys were strictly prohibited from
taking advantage until approval was given by the Delaware Supreme Court.7
Recently, the Delaware Supreme Court has granted this approval, opening
the door for Delaware law firms to take similar advantage
'Allison L. Bergman, Covering Your Assets: Missouri's New Limited Liability
PartnershipLaw, 63 UMKC L. REv. 679, 679 (1995).
2
Jennifer J. Johnson, LimitedLiabiliyforLawyers: GeneralPartnersNeed Not Apply,
51 Bus. LAW. 85, 88 (1995).
'See infra notes 77-80 and accompanying text.
'See infla notes 76-77 and accompanying text.
'See 1991 Tex. Gen. Laws 901, § 84; infiranote 86 and accompanying text.
'See infira note 176 and accompanying text. As of July 1998 there were 74 Delaware
businesses registered as Delaware LLPs. Search of DELAWARE SEcRETARY OF STATE OFFICE
statistics (July 1998).
7
See infranotes 177-78 and accompanying text
'See infra note 180 and accompanying text. Several firms have already made the switch.
Young,Conaway, Stargatt & Taylor (Young, Conaway) was the first major Delaware-based firm
to register as an LLP. Joseph M. Nicholson, a partner at Young, Conaway stated that the firm had
no hesitations aboutregistering as an LLP. Telephone interviewwith Joseph M.Nicholson, Partner,
Young, Conaway, Stargatt & Taylor (Nov. 12,1997). Smith, Katzenstein & Furlow and Potter,
Anderson & Corroon have also registered as LLPs. Search ofDELAWARE SECRETARY OF STATE
DELAWARE JOURNAL OF CORPORATE LAW
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This note begins by examining the various business forms that are
available to Delaware law firms. It will also give a brief history of the LLP
and provide a general examination of its characteristics. The third section
will focus on Delaware LLP law and will discuss the extent to which
Delaware LLP law differs from LLP legislation enacted in other states.
Several issues arising under the Delaware statute, as well as concerns of LLP
critics, will also be discussed. Finally, this note concludes that, although the
LLP may not be a perfect fit for every Delaware law firm, it offers
substantial benefits over any alternative entity and the vast majority of
Delaware firms stand to benefit substantially by adopting the LLP structure.
II. VARIOUS BUSINESS FORMS AVAILABLE TO DELAWARE LAW FIRMS
The Rules ofthe Delaware Supreme Court restrict the business forms
under which attorneys may practice.9 Attorneys are currently permitted to
practice law under the following business forms: general partnership,
professional service corporation (PC), limited partnership, limited liability
company (LLC), and limited liability partnership (LLP).' ° The following
section provides a brief history and discusses the primary characteristics of
each of these forms.
A. GeneralPartnership
Historically, general partnership has been the entity of choice among
law firms.1 This trend most likely arose because, until recently, lawyers
were largely restricted from practicing under any other form. 2 This
prohibition was based upon the belief that a corporate structure was not
suitable to the practice of law. 3 Despite the passage of legislation permitting
lawyers to practice law in other forms, partnership remains the "timehonored" and established form of organization for the practice of law. 4
OFFICE statistics (July 1998). To date, these three are the only Delaware firms to register. Id For
a look at foreign LLP law firms registered in Delaware, see infranote 189 and accompanying text.
"See infra text accompanying note 179.
"0DEL. CT. CODE OF PROFESSIONAL RESPONSIBILHTY RULE 67 (1999).
"N. Scott Murphy, It's Nothing Personal: The Public Costs ofLimited LiabilityLaw
Partnerships,71 IND. L.J. 201, 209 (1995).
"John Richards, Illinois Professional Service Firms and the Limited Liability
Partnership:Extending the Privilege to Illinois Law Firms, 8 DEPAuL BuS. LJ. 281, 283 (1996).
"Johnson, supra note 2, at 92; see Murphy, supranote 11, at 205-06.
"Johnson, supranote 2, at 85.
1999]
LIMITED LIABILrrY PARTNERSHIP
Partnership as a form of business organization is far from new. 5 The
Uniform Partnership Act (UPA) was adopted in 1914 as a codification of
common law principles which had been in existence for years. 6 The UPA
set forth standards regarding the nature of the partnership, 7 relations of
partners to third parties, 8 relations of partners to one another, "gthe property
rights of partners,20 and the termination of a partnership. 1 Partnership
legislation enacted in Delaware is almost identical to that of the UPA.'
One of the most attractive elements ofthe general partnership is passthrough taxation. Under this principle, partnership profits are not subject to
an entity level tax.' There is no tax imposed until the profits are received
by one or more partners as income.' The partner's income is then taxed as
personal income. In this manner, general partnerships avoid the double tax
that corporate entities are required to pay.'
Another attractive aspect of the general partnership is its flexibility.
No formal written agreement is required to form a partnership.Y This makes
a general partnership very easy to create and maintain.2" In addition, there
are very few aspects of the partnership structure that cannot be altered by
agreement.29
These benefits, however, come at the expense of personal liability.
Under partnership law, each partner is unlimitedly personally liable for both
the misconduct of his or her partners, as well as any debts of the partnership
"5Carol R. Goforth, Limitingthe Liability ofGeneralPartnersin LLPs: An Analysis of
StatutoryAlternatives, 75 OR. L. REv. 1139, 1158 (1996).
16Id.
"7See UNIF. PARTNERsHIP ACr §§ 6-8, 6 U.LA. 125 (1995).
"'See id §§ 9-17.
"'See id. §§ 18-23.
'"See id §§ 24-28.
2'See UNin. PARTNERSHipACT §§ 29-43,6 U.L.A. 125 (1995).
2'CompareDEL. CODEANN. tit. 6, §§ 1501-1543 (Supp. 1997), with UNiF. PARTNERSHIP
ACT §§ 1-43, 6 U.L.A. 125 (1995).
"I.R.C. § 701 (1998).
2'Id.
'See id. § 702.
''See id § 11(a). Corporations are generally required to pay a tax on profits. Id.
'-SeeUNIF. PARTNERsHi ACr § 7, 6 U.L.A. 125 (1995). Accord DEL. CODE ANN. tit.
6, § 1507 (establishing rules for determining the existence of a partnership under Delaware law).
'Murphy, supra note 11, at 209.
'See, e.g., UNIF.PARTNERs'Acr §§ 18-19, 37, 6 U.LA. 125 (1995) (establishing that
the rights and duties of partners, the place where partnership books are kept, and the right to wind
up are subjectto the agreements between partners). AccordDEL. CODEANN. tit. 6, §§ 1518-1519,
1537 (Supp. 1997).
DELAWARE JOURNAL OF CORPORATE LAW
[Vol. 24
to the extent that either exceed the assets of the partnership." Therefore,
should a general partnership be burdened with a financial obligation that
exceeds the wealth of the firm, every partner in that firm stands to lose not
only his or her own economic interest in the partnership, but also any
personal assets that partner may have accumulated throughout the course of
his or her life."
B. ProfessionalCorporations
The professional corporation (PC) is a largely outdated business
entity.32 The first professional corporation statutes were enacted in the 1960s
to allow lawyers and other professionals to make use of the corporate form.33
Today, every state, including Delaware, has its own PC statute.34 PCs are
structured and operated much like a regular corporation. 5 They are also
bound by the state's body of corporate law and must abide by the usual
corporate formalities. 6
As horrifying as the thought ofunlinited personal liability may seem,
it was dissatisfaction with another aspect of partnership law that led to the
creation of professional corporations.37 Despite the favorable pass-through
tax status of the general partnership, partners were, up until recently, denied
certain personal tax benefits for which corporate employees were eligible.38
The most significant of these benefits was the lenient tax treatment of
qualified corporate retirement plans.39 By adopting the PC form, attorneys
and other professionals were able to take similar advantage."
"OUNIF. PARTNERSHIP ACT §§ 13-15, 6 U.L.A. 125 (1995). The Revised Uniform
Partnership Act (RUPA) promulgated in 1994 retains this principle. AccordDEL. CODE ANN. tit.
6, §§ 1513-15 (Supp. 1997). See also DEL. CT. CODE OF PROFESSIONAL RESPONSIBILITY RULE
67(h)(ii) (1999) ("Each shareholder, partner or member of a Professional Organization shall be
jointly and severally liable for any liability of the Professional Organization .... ).
3"See UNIF.PARTNERSHpAcr §§ 13-15, 6 U.L.A. 125 (1995). AccordDEL. CODEANN.
tit. 6, §§ 1513-15 (Supp. 1997); DEL. CT. CODE OF PROFESSIONAL RESPONSIBILITY RULE 67(h)
(1999).
3"See infra text accompanying notes 53-55.
33Johnson, supra note 2, at 92.
3See ROBERT W. HAMILTON, CASES AND MATERIALS ON CORPORATIONS INCLUDING
PARTNERSHIPS AND LumTED PARTNmRSHIPS 164 (5th ed. 1994). See, e.g., DEL. CODE ANN. tit. 8,
§§ 601-619 (Supp. 1998). Delaware's PC statute was adopted in 1969.
3Johnson, supranote 2, at 92-93.
36DEL. CODE ANN. it. 8, § 619 (Supp. 1998).
37HAMILTON, supranote 34, at 164-65.
3"Johnson, supranote 2, at 92.
3Murphy, supranote 11, at 206.
40
d.
1999]
LIMITED LIABILITY PARTNERSHIP
As corporate entities, PCs are subject to the same entity level tax as
regular business corporations.4 1 There is an exception, however, for PCs that
elect Subchapter S status.42 Subchapter S status allows a corporation to
avoid the entity level tax and receive pass-through taxation.43 To qualify for
S status, a corporation must have seventy-five members or less" and no
more than one class of stock.45 To avoid losing subchapter S status, a PC
must be careful not to violate the single class of stock requirement when
distributing profits to its shareholders.' If more than one class of stock is
present, a PC will lose its S status and will be subject to an entity level tax!'
Although tax incentives were the primary reason for allowing
professionals to incorporate," the PC does provide shareholders with some
measure of protection from Vicarious liability.49 Under the basic corporate
concept of limited liability, shareholders are not personally liable for
ordinary business debts of the PC." The PC statute specifically states,
however, that vicarious liability for the professional misconduct of fellow
shareholders remains.5
4
Johnson, supranote 2, at 139. See supra note 26.
"Treas. Reg. § 1.1362-1 (1998). "An election may be made only with the consent ofall
ofthe shareholders ofthe corporation atthe time ofthe election." Id The vastmajority of law firms
operating as PCs are eligible for and elect subchapter S status.
431,d
4
I.R.C. § 1361(b)(1XA) (1998). Until recently, S-corporations were restricted to 35
members or less.
451d. § 1361(b)(1)(D).
'Richards, supranote 12, at 298. See Johnson, supra note 2, at 139.
47I.RIC. § 1361(a)(2) (1998).
"See supratext accompanying notes 37-39.
41See infra text accompanying notes 50-51.
"REV. MODEL Bus. CORP. Acr § 6.22 (Supp. 1998).
"DEL. CODE ANN. tit. 8, § 608 (Supp. 1998). Accord DEL. CT. CODE OF
PROFEssIoNAL REsPoNsiBLrrY RULE 67(h)(ii) (1999); First Bank & Trust Co. v. Zagoria, 302
S.E.2d 674 (Ga. 1983) (holding an uninvolved attorney personally liable for the misconduct of his
fellow shareholder).
The professional nature ofthe law practice and its obligations to the public
interest require that each lawyer be civilly responsible for his [or her]
professional acts. A lawyer's relationship to his [or her] client is a very
special one. So also is the relationship between a lawyer and the other
members ofhis or her firm a special one. When a client engages the services
of a lawyer the client has the right to expect the fidelity of other members of
the firm. It is inappropriate for the lawyer to be able to play hide and seek in
the shadows and folds of the corporate veil and thus escape the
responsibilities of professionalism.
Mai at 675.
DELAWARE JOURNAL OF CORPORATE LAW
[Vol. 24
Despite favorable tax treatment and a greater degree of liability
protection, the vast majority of general partnerships never became PCs.52
Then, in 1981, Congress passed two pieces of legislation that gave
partnerships the same tax incentives that had previously been available only
to corporate entities.53 As a result of this legislation, any tax advantage of
switching to PCs has largely disappearedT M To quote one law review author,
"[M]any professionals now practice in PCs in spite of, rather than because
of, the tax consequences."55
C. LimitedLiability Company
The limited liability company (LLC) is, in many ways, a combination
of the partnership and corporate forms.56 The popularity of LLCs exploded
after a 1988 tax ruling held that they would receive the same pass-through
tax treatment as partnerships. 7 Statutes permitting the use of LLCs were in
place in all fifty states by the end of 1996.58
Under the LLC form, members get the advantages of limited liability
while retaining the tax status and flexibility of the general partnership.59 To
form an LLC, the investors must file articles of organization with the proper
state authority.' The investors in an LLC are not referred to as "partners"
or "shareholders," but rather as "members., 6' LLCs are usually permitted by
statute to engage in any lawful business.62
52
Murphy, supranote 11, at 206. This is most likely due to the level of comfort and
familiarity most
firms felttowards the partnership form. See supratext accompanying notes 11-14.
3
EcoNoMxc RECOVERY ACT, Pub. L. No. 97-34, 95 Stat. 172 (1981); TAx EQurrY AND
FiscAL REsPONSIBILrrY ACT, Pub. L. No. 97-248, 96 Stat. 324 (1982).
'See Forest J. Bowman, The ProfessionalCorporation-Hasthe Death Knell Been
Sounded?, 3 PEPP. L. REv. 515 (1983).
"Johnson, supranote 2, at 139.
'Goforth, supranote 15, at 1150; Beth Duncan, ChoiceofEntity: Conversionto Limited
LiabilityPartnershipsIs Easy, But The Safety Net They Offer Is Only a PartialOne, BNA's CORP.
COUNSEL WEEKLY, Feb. 8, 1995, at 8.
'Johnson, supranote 2, at 102. In 1988, the IRS authorized a Wyoming LLC to file as
a partnership for tax purposes, despite the existence of limited liability for its members. Rev. Rul.
88-76, 1988-2 C.B. 360.
"Goforth, supra note 15, at 1150.
"Johnson, supranote 2, at 124; see UNtF. LTD. LLAB. Co. ACT § 303, 6A U.L.A. 454
(1995) ("[IThe debts, obligations, and liabilities of a limited liability company, whether arising in
contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company.").
AccordDEL. CODEANN. tit. 6, § 18-303 (Supp. 1998).
60See Usin. LTD. LIAB. Co. ACT § 202(a), 6A U.L.A. 443 (1995). AccordDEL. CODE
ANN. tit.6, § 18-201(a) (Supp. 1998).
61
See UNIF.LTD.LIAB. Co. ACT § 101, 6A U.LA. 431 (1995). AccordDEL.CODEANN.
tit. 6, § 18-101(11) (Supp. 1998) (defining "member").
62See UNIF. LTD. LIAB. Co. ACT § 112, 6A U.L.A. 425 (1995).
1999]
LIMITED LIABILITY PARTNERSHIP
. Historically, the primary disadvantage of the LLC was that its
formation required the creation of a new business entity.63 In many states,
including Delaware, this is no longer the case." Yet, the mere fact that
LLCs are so new has dissuaded many firms from switching.6'
D. Limited Partnership
The limited partnership form is identical to general partnership in
almost all aspects except the liability of partners and control of the
partnership." In a limited partnership, there are two types of partners:
general partners and limited partners.67 Status as a general partner in a
limited partnership is identical to partnership status in a general
partnership.6 8 General partners in a limited partnership, just as in a general
partnership,69 are vicariously liable for any and all financial obligations that
exceed the wealth of the partnership." Limited partners, however, are not
vicariously liable." In the case of financial difficulty, a limited partner only
stands to lose his or her interest in the partnership. The personal assets of a
limited partner are not exposed? 2 The drawback to limited partner status,
however, is that to avoid personal liability, limited partners may not
participate in the control of the business.'
Although attorneys have been permitted to form limited partnerships
for more than a decade, very few have chosen to do so.' Perhaps this is
because attorneys do not want to relinquish control and yet do not want to
be held vicariously liable.75 With the advent of limited liability partnerships,
the number of general partnership law firms will continue to decrease.
'Darryl Van Duch, Some FirmsHesitate to.Adopt LLP., NAt,L., May 5, 1997, at
Al.
"See DEL. CoDE ANN.tit. 6, § 18-214(g) (1997) ("[The converting other entity shall not
be required to wind up its affairs or pay its liabilities and distribute its assets and the conversion...
shall constitute a continuation of the existence of the converting other entity .... ).
"'[S]ome issues such as securities law treatment and various tax issues have not been
fully dealt with." Goforth, supranote 15, at 1152 (footnote omitted).
"See REv. UNIF. LTD. PARTNsHIP AcT § 303(a), 6A U.L.A. 1 (1995).
67Ia § 101, 6A U.L.A. 61. Accord DEL. CODEANN. tit. 6, § 17-101 (Supp. 1998).
68REv. UNiF. LTD. PARTNERSHIPACr § 101, 6A U.L.A. 61 (1995).
"'See supranotes 30-31 and accompanying text.
7REv. UNiF. LTD. PARTN ansI Acr § 403(b), 6A U.L.A. 177 (1995).
711d. § 303(a), 6A U.L.A. 144.
72
id
73
Id
4
Johnson,supranote 2, at I 11.
"See supranotes 69-73 and accompanying text.
DELAWARE JOURNAL OF CORPORATE LAW[
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E. Limited Liability Partnership(LLP)
1. History
The first LLP statute was enacted in Texas in 199176 as an outgrowth
of the savings and loan crisis of the 1980s.' Texas was hit particularly hard
by the bank failures.' A significant number of the law suits brought by the
Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust
Corporation (RTC) were brought against the lawyers and accountants in
Texas who had represented the failed financial institutions.7 9 Many of
Texas' largest and most prestigious law firms found themselves facing
financial ruin in the wake of settlements and judgments resulting from the
savings and loan crisis.8
Under basic partnership principles and Texas law, partners in a law
firm are personally liable for any debts that exceed the assets of the firm."1
Needless to say, massive settlements against some of the state's largest firms
sent shockwaves throughout the Texas legal community. There were
complaints that professional partnerships should be able to receive the same
level of liability protection as corporate entities.8 "
The 1991 LLP legislation was specifically drafted to provide law
firms with a greater measure of protection." The Texas legislation was
designed to apply to both professional and non-professional partnerships and
shields partners from vicarious liability for professional malpractice.'
Under the Texas LLP statute, a partner is not personally liable for "debts and
obligations of the partnership arising from errors, omissions, negligence,
incompetence, or malfeasance... by another partner or a representative of
7
See 1991 Tex. Gen. Laws 901, § 84. For a behind the scenes look at the enactment of
Texas LLP statute and a detailed discussion of its legislative history, see Robert W. Hamilton,
RegisteredLimitedLiability Partnerships:Presentat the Birth (Nearly), 66 U. COLO. L. REv.
1065, 1071-74 (1995).
Ronald E. Mallen, Ethics/MalpracticeIssues: The ProfessionalandEthicalIssues
FacingtheAttorne-Employee, in THEBESTENTITY FoRDoINGTHEDEAL 1996, at 993, 995 (PLI
Corp. Law & Practice Course Handbook Series No. B-937, 1996).
7
'Hamilton, supranote 76, at 1069. Approximately one-third of the savings and loan
failures occurred in Texas. Id.
79
1d.
'For avivid description ofthe problems facing one majorDallas law firm, see Hamilton,
supra note 76, at 1069-71.
8
See supra text accompanying notes 30-3 1.
'Hamilton, supra note 76, at 1071.
'Bergman, supranote 1, at 681.
"Mallen, supranote 77, at 995.
"See 1991 Tex. Gen. Laws 901, § 84.
1999]
LIMITED LIABILriY PARTNERSHIP
the partnership not working under the supervision or direction" of the
partner."6 The Texas statute, hoivever, did not limit individual liability for
a partner's own negligent actions,"7 nor did it eliminate liability for the
ordinary business obligations of the partnership.8
Soon after the Texas LLP statute was enacted, the IRS issued a ruling
that LLPs would be taxed as partnerships.89 Since then, LLPs have
experienced exponential growth.' During the first year, more than 1200 law
firms adopted LLP status, including many of the state's largest and most
prestigious firms. Over the next three years that number jumped to almost
1600.' The New'York LLP statute, adopted in 1994, achieved a similar
level of popularity. 3 Several other states received as many as 2000
applications for LLP status during the first year it was available. 4
Although the litigation arising out of the savings and loan disaster was
the impetus for LLP legislation in Texas,9' malpractice actions against
professional firms are not a new phenomenon.' Over the past few years,
however, this type of litigation has experienced a marked increase.' Both
law and accounting firms have been particularly beset"9 During the one year
8Tx REv. Civ. STAT. ANN. art. 6132b-3.08(a)(2) (West Supp. 1998).
Id art. 6132b-3.08(a)(2)(A).
uId art. 6132b-3.08(aX3XA). It is interesting that the Texas LLP statute provides the
inverse of the protection by most PC statutes. Under the Texas LLP statute, partners remain
vicariously liable for ordinary business obligations of the firm, but are granted liability protection
with regard to the professional malpractice of others representing the firm. Id art. 6132b3.08(a)(2)(A)-(B). Most PC statutes, on the other hand, provide for the opposite: limited liability
for the ordinary business obligations ofthe entity and unlimited personal liability for the professional
malpractice of one's colleagues. See supratext accompanying notes 50-51.
"Priv. Ltr. Rul. 92-29-016 (Apr. 16, 1992) ("[The] L.L.P. will be classified as a
partnership for federal tax purposes.").
'Hamilton, supranote 76, at 1065.
"Id. at 1065.
92Id at 1065 n.3.
"Richards, supranote 12, at 283.
"Bergman, supranote 1, at 682-83.
"See supratext accompanying notes 76-83.
'See generallyRonald E. Mallen & Jeffrey M. Smith, Legal Malpractice§§ 7.10-7.12
(4th ed. 1996) (discussing privity and negligent misrepresentation).
'Johnson, supranote 2, at 87.
"Massive verdicts and settlements against large and prestigious law firms are becoming
increasingly prevalent. See, e.g., Some Law FirmsWere Hitby Massive Suits, NAYtL LJ., Dec. 26,
1994, at Cl I (discussing several large claims andjudgments against law firms in 1994, including:
an $84 million jury verdict against Keck, Mahin & Cate of Chicago for securities fraud (later
reduced to $68 million); a $52 million claim against Shook, Hardy and Bacon, PC, of Kansas City
for racketeering; a $25.5 million verdict against Miller, Canfield, Paddock and Stone, PLC, of
Detroit for malpractice; a $20 million claim against Milbank, Tweed, Hadley and McCloy of New
York for malpractice; a $17.7 million verdict against Vinson & Elkins, LLP, of Houston for
malpractice; and a $7.1 million judgment against Baker & McKenzie for sexual harassment (this
DELAWARE JOURNAL OF CORPORATE LAW
[Vol. 24
span between 1991 and 1992, both the legal and accounting professions
facedjudgments of nearly $1 billion.'
Unfortunately, malpractice insurance cannot alleviate all concerns."c
Massive verdicts and settlements often exceed a firm's insurance coverage
by a substantial amount,' thereby exposing often innocent partners to
unlimited personal liability." 2 For example, in 1992, Jones, Day, Reavis &
Pogue of Cleveland settled claims arising out of a failed savings and loan for
$51 million, though they only had $19.5 million in insurance coverage. 3
In 1993, the New York firm of Kaye, Scholer, Fierman, Hays & Handler
settled a similar $275 million claim for $41 million."' Yet this amount still
exceeded the available insurance by $16 million."0 Notably, since both
settlement agreements were structured as to allow for installment payments
over a period of years, neither resulted in a forced liquidation of the law
firm." In addition, insurance does not cover a law firm's inability to meet
their ordinary business obligations such as lease agreements. 7
Due to the concerns over malpractice litigation and inadequate
insurance, interest in limited liability for professionals is at an all time
high. 8 Although limited liability protection was available to law firms
through the LLC, procedural and structuring problems tended to turn
lawyers away."° In fact some view the LLP as a reaction to prior structuring
difficulties of the LLC." °
The introduction of LLP legislation in various state legislatures has
resulted in a great deal of heated debate."' One of the major concerns with
the LLP has always been how to deal with an LLP that has several branch
judgment was later settled)). For a discussion ofrecent litigation against accountants, see Goforth,
supranote 15, at 1141.
'Lee Berton & Joann S. Lublin, Seeking Shelter: PartnershipStructure is Calledin
Question as Liability Risk Rises, VALL ST. J., June 10, 1992, at Al.
"Johnson, supranote 2, at 88.
l01d.
"See supra text accompanying notes 30-3 1.
"Hamilton, supranote 76, at 1085 n.52.
"See Michael Orey, The Lessons ofKaye, Scholer: Am I My Partner'sKeeper?, AM.
LAw., May 1992, at 3, 81.
"See Sharon Walsh, TopLawyersLeaveKaye, Scholer: 0ThSLawsuit, Freeze onAssets
Send Partnersto Other Firms,WASH. POST, Sept. 19, 1992, at A8.
"See Hamilton, supra note 76, at 1085 n.52.
"Johnson, supranote 2, at 88. See, e.g., Bergman, supranote 1,at 682 (discussing the
bankruptcy plan which required the partners ofa major law firm to collectively pay more than $40
million over the course of 10 years).
"Bergman, supra note 1, at 699; Richards, supra note 12, at 283.
'See supra text accompanying note 63.
"Old.
"'See infra Part I1.E.3.
1999]
LlMrTED LiABILrIY PARTNERSHIP
offices in differentjurisdictions."' It was primarily in an effort to address
this concern that LLP statutes spread so rapidly throughout the country."1
Regardless of their114merits, LLP statutes have now been adopted in every
state but Vermont.
2. Nature and Characteristics of the LLP
The LLP is a business entity' that bears a close resemblance to the
LLC." 6 Like the LLC, the LLP combines the fundamental aspects of the
general partnership with the corporate characteristic of limited liability. 17
Yet, unlike the LLC, the LLP is bound by the large body of already existent
general partnership law, in so far as the partnership law is not in conflict
with the provisions of the state LLP statute."' Under the original LLP
concept as seen in the Texas statute,119 partners are subject to the same
benefits, duties, and obligations as general partners except that there is no
longer any personal liability for negligence or misconduct in which they
were not directly involved. 2 For example, the LLP may protect partners
from misconduct such as securities law violations, broadened Rule 11
only when the claim or claims exceed
sanctions, and malpractice claims, but
2
the assets and insurance of a firm.' '
It is important to remember that the liability protection provided by
LLP statutes is personal liabilityprotection rather than liability protection for
"'Hamilton, supranote 76, at 1074-75. Under Delaware LLP law, LLPs registered in
otherjurisdictions are notrequired to register in Delaware, and will be governed subject to the laws
of the state in which they are registered. DE. CoDEANN. tit. 6, § 1547 (Supp. 1999). See infira
note 181.
"'Hamilton, supranote 76, at 1075.
"'See VT. STAT. ANN. tit. 11, § 1207 (Supp. 1997).
"There are two schools ofthoughtregarding the nature ofthe LLP. The first school sees
the LLP as a subtle variation ofthe classic general parlnership. Legal scholars from this school have
described LLPs as "a new-fangled version of the classic general partnership, not a new business
entity" (Bergman, supra note 1, at 679); as "a general partnership with a few important
modifications" (Goforth, supra note 15, at 1144); and as 'just a form of general partnership"
(Duncan, supra note 56)). The other school sees LLPs as anentirelynewbusiness entity. Members
of this school have described LLPs as "new entities that combine the features of a general
partnership with limited liability" (Johnson,supra note 2, at 106) and as "themost radical departure
yet" from accepted partnership liability principles (Murphy, supranote 11, at 201).
"'See supraPartlI.C. Second generation LLP statutes are becoming more and more like
LLCs. Hamilton, supranote 76, at 1066, 1095. See infratext accompanying notes 133-37.
.'Johnson,supra note 2, at 106.
"'idat 109.
I'rx. Rnv. Civ. STAT. ANN. art. 6132b-3.08 (Supp. 1998).
'"See id; Hamilton, supranote 76, at 1067.
"'Bergman, supranote 1, at 679.
DELAWARE JOURNAL OF CORPORATE LAW
[Vol. 24
the firm itself.' As with corporate entities, a partner's interest in the LLP
itself is not protected." The so-called "shield of limited liability" only
comes into play after the firm assets have been dissolved."
Because of the rapid spread of LLPs,' the state statutes governing
them often differ substantially. 26 The most important difference is in the
area of liability protection. 27 Legal scholarship has divided LLP statutes
into two groups: first generation statutes and second generation statutes."2
LLP statutes fit into one of these two categories based on the types of
vicarious liability for which they offer protection. 29
First generation statutes relieve partners of vicarious liability for the
negligence or misconduct of others in the firm as long as they were not
personally involved. 30 First generation statutes do nothing, however, to alter
The
a partner's liability for any ordinary business debts ofthe13 partnership.''
2
Texas LLP statute is a typical first generation statute.
Second generation statutes create a much greater shield from liability
than do first generation statutes.' Because the first generation statutes do
not provide liability protection from ordinary business transactions, they are
not fully "bullet-proof."'3 4 In 1994, however, Minnesota passed an LLP
statute that did grant liability protection from ordinary business debts.'35
Since then, all but eight of the forty-nine states that have enacted LLP
statutes have followed suit.'36 Under these second generation statutes,
'See infra text accompanying notes 123-24.
'-Richards, supranote 12, at 284.
"'Hamilton, supranote 76, at 1076-77. The liability protection of the LLP has been
referred to as "death insurance" for innocent partners because it only comes into play upon the
collapse of the firm. Id (citing Bart Ziegler, Top Accountants to Shield Partnersfrom Lawsuits,
WALL ST. J., July 29, 1994, at C15).
InSee supratext accompanying notes 90-94.
'"Johnson, supra note 2, at 107.
'27See id. at 107-110.
"See Goforth, supra note 15, at 1153-54.
291d.
'301d. at 1153.
1'3 Goforth, supranote 15, at 1153. See TEx. REv. Cw. STAT. ANN.art. 6132b, § 15
(Supp. 1998).
'3Hamilton, supranote 76, at 1087.
"See Goforth, supra note 15, at 1153.
3'See MINN. STAT. ANN. § 323.14 (West 1995).
3'he eight states that continue to have first generation statutes are: Arizona, Iowa,
Louisiana, North Carolina, Pennsylvania, South Carolina, Texas, and Utah. See ARiZ. REv. STAT.
ANN. § 29-215 (West 1998); IOWA CODEANN. § 486.15 (West Supp. 1998); LA. Rxv. STAT. ANN.
§ 9.3431 (West Supp. 1998); N.C. GEN. STAT. § 59-45 (Supp. 1997); 15 PA. CONS. STAT. ANN.
§ 8204 (West. Supp. 1998); S.C. CODE ANN. § 33-41-370 (Law. Co-op. Supp. 1996); TEx. REv.
1999]
LIMITED LIABILITY PARTNERSHIP
partners are shielded from all entity-level debt. 37
An important point to
reiterate is that, regardless of whether the statute in question is a first
generation or a second generation, lawyers will always remain personally
liable for their own negligence and misconduct. 38 This stems in part from
ABA ethical requirements that dictate that lawyers must remain individually
liable for their own conduct. 39 In addition, there is the general agency
principle that an actor is responsible for his or her own actions and is not
relieved of liability merely because he or she was acting on behalf of another
entity. 140
LLP statutes also customarily provide that supervising partners who
were aware, or should have been aware, of negligent activity or misconduct
remain personally liable for any ensuing consequences. 141 Under common
law, supervisory liability is based upon a showing that a special relationship
existed between the supervisor and the tortfeasor and that the supervisor in
question was negligent in his supervision.14 1 State LLP statutes often vary
or are ambiguous as to whether supervisors who were not negligent in their
supervision may be found personally liable. 43 Some states do not provide
for any form of supervisor liability.1"
Other than restrictions that may exist on the use of LLPs by nonprofessionals, 45 the LLP is simple and user-friendly, both procedurally and
structurally.'" The transition from general partnership to LLP status is easy,
and can be accomplished with a minimal amount of paperwork and
§ 48-1-12 (Supp. 1998).
TheNational Conference ofCommissioners onUniform State Laws has recommendedthatall states
adopt second generation LLP statutes and become "fill-shield"jurisdictions. Van Duch, supranote
63, at Al.
"1'Goforth, supranote 15, at 1153.
"8 Johnson, supranote 2, at 91.
'MODEL RULES OF PROFESSIONAL CoNDucT Rule 1.8(h) (1996).
'"RESTATEMENT(SEcOND) OFAGENcY § 343 (1958). See Johnson,supranote 2, at 91.
M'DEL. CODE AN. tit. 6, § 1515(c) (Supp. 1998).
MJohnson, supranote 2, at 113.
'43See, e.g., S.C.CODEANN. § 33-41-370()) (Law. Co-op. Supp. 1996) (limiting liability
to situations where supervisor was "at fault" in supervising).
'4"See, e.g., COLO. REv. STAT. ANN. § 7-60-115(2)(a) (West Supp. 1997); GA. CODE
ANN. § 14-8-15(c) (Supp. 1998); IND. CODEANN. § 23-4-1-15(3) (Michie Supp. 1997); Ky. REv.
STAT. ANN. art. § 362.220 (Banks-Baldwin Supp. 1997); LA. REv. STAT. ANN. § 9.3431 (West
Supp. 1998); UTAH CODE ANN. § 48-1-12 (1998).
HISee Johnson,supranote2, at 107; Bergman, supranote 1,at680 (noting statutes allow
veterinarians, doctors, dentists, accountants, lawyers, and corporatejointventures to take advantage
of the LLP form).
'"See infranotes 147-54 and accompanying text.
Civ. STAT. ANN. art. 6132b, § 15 (West Supp. 1998); UTAH CODE AN.
DELAWARE JOURNAL OF CORPORATE LAW
[Vol. 24
expense. 47 Firms must simply file an application, satisfy the minimum
capital requirement, and pay the registration fee. 48 Partnership agreements
149
do not have to be rewritten, nor is it necessary to form a governing board.
Registration is often good for one year,' and LLPs must frequently reregister every year.'5 '
There is often a minimum capital requirement for LLPs that varies by
jurisdiction."
Firms typically satisfy this requirement by maintaining an
insurance policy that covers professional malpractice claims.' In some
states, it is also possible to satisfy the requirement by setting aside an
identical amount of funds in a bank account specifically reserved to settle
malpractice claims against the firm.i14
LLPs, just like general partnerships, are directly managed by the
partner owners, unless otherwise agreed.'55 Consequently, each partner in
an LLP maintains the power to bind the partnership, unless the default rule
is altered.'56 In addition, termination of an LLP is an important issue to
address when drafting the LLP agreement,' as LLPs can be dissolved with
relative ease unless modified by agreement."5
'Duncan, supra note 56. See also Mallen, supranote 77, at 1000 (claiming that the
transition to an LLP is much easier than the transition to an LLC); Bergman, supranote 1, at 680
(same); Johnson, supranote 2, at 136 (noting the conversion to an LLP is subject to relatively few
regulatory requirements).
'Goforth, supranote 15, at 1145-47. For specific requirements in Delaware, see infra
notes 187-89 and accompanying text.
'Larry Smith, LLPs: Politically,a Ripe Time ForFirmsto Act, OF COUNs., Aug. 16,
1993, at 2, 2.
""Martin I. Lubaroff, RegisteredLimitedLiability Partnerships- The Next Wave,
INSIGHTs, May 1994, at 23, 27.
"See, e.g., DEL. CODE ANN. tit. 6, § 1544(e) (Supp. 1998).
'Goforth, supranote 2, at 1146. The minimum capital requirement in Texas is only
$100,000. TEx. REv. Civ. STAT. ANN. art. 6132b-3.08(d) (Supp. 1999). It has been kept low
intentionally so that smaller firms would be able to make use of the LLP without difficulty.
Hamilton, supranote76, at 1076. In most states, the minimum requirement is $1 million. See, e.g.,
DEL. CODE ANN. tit. 6, § 1546(a) (Supp. 1998). Note that some states do not have any minimum
capital requirement. See, e.g., LA. REv. STAT. ANN. § 9.3435 (1997).
"'Goforth, supranote 15, at 1146-47.
1"4Id.
"'Larry E. Ribstein, PossibleFuturesFor UnincorporatedFirms, 64 U. CN. L. REV.
319, 334 (1996). See UNIF. PARTNERSHIP Act § 18, 6 U.L.A. 125 (1995). Accord DEL. CODE
ANN. tit. 6, § 1518 (Supp. 1998).
"'Ribstein, supra note 155, at 324. See UNiF. PARTNERSHIP ACT § 9, 6 U.L.A. 125
(1995). Accord DEL. CODE ANN. tit. 6, § 1509 (Supp. 1998).
""See Richards, supra note 12, at 300.
"'Subjectto any agreementbetween the parties, apartnership or LLP may be terminated
by anyone ofthe following events: (1) the termination ofthe definite term orparticular undertaking
specified in the agreement; (2) the express will of any partner when no definite term or particular
undertaking is specified; (3)the express will ofall the partners who have not assigned their interests;
1999]
LIMITED LIABILITY PARTNERSHIP
3. Public Policy Considerations of the LLP
The LLP was created because of concerns about the fundamental
fairness of unlimited personal liability for the actions of one's partners. 15 9
Logically, it seems harsh to punish one partner for the acts of another that he
or she may not even know."W Under traditional partnership rules, however,
a partner is liable for the conduct of others even though most partners in a
large firm have no real ability to supervise or control every other partner. 61
A great deal of ink has been spilled over the past few years in
attempting to determine the value of the LLP. 62 Valid concerns have been
raised by both sides. Those in favor of LLPs stress the fact that law firms
today are structurally much different than they were even a generation ago."
These firms are becoming increasingly larger in size, and are consequently
becoming more difficult to effectively monitor.1 The theory ofjoint and
severable liability certainly does not seem as realistic in the modern law firm
setting as it once did. 65 LLP proponents also stress the fact that limited
liability does not prevent recovery against law firms, it merely prevents
recovery against the personal assets of innocent partners."'
(4) the bona fide expulsion of any partner fiom the business; (5) the death or bankruptcy of any
partner;, and (6) court ordered dissolution. UNIF.PARTNERSHIP ACT § 31, 6 U.L.A. 771 (1995).
AccordDEL. CODE ANN. tit. 6, § 1531 (Supp. 1998).
""9See supratext accompanying notes 160-61.
'"Hamilton, supranote 76, at 1102.
"'Goforth, supranote 15, at 1159, 1170.
'"See generally Bergman, supranote 1,at 699-700 (stating that states should embrace
LLPs to limit expanding liability, but warning against the potential suspicion that may occur in
clients); Goforth, supranote15, at 1221 (stating thatLLPs help alleviate the unfairness ofunlimited
partner liability, but have also created confusion); Hamilton, supra note 76, at 1103 (stating that
current LLP statutes being enacted are unnecessarily reversing the traditional rules of unlimited
liability and will bolster the growing mistrust ofthe legal profession); Johnson, supranote 2, at 145
(claiming that law firms can achieve a number of benefits from LLP status, but risk a potentially
divisive impact on the law firns' internal dynamics); Murphy, supranote 11, at 233 (claiming that
law firms with LLP status create a severe public cost, namely, clients' inability to recover for and
prevent legal malpractice); Terrence A. Oved, New York State LimitedLiability Partnerships,67
N.Y. ST. B.J., Mar.-Apr. 1995, at 38, 73 (arguing that LLPs create tax advantages and liability
limitations that make it the best form of organization for business professionals); Ribstein, supra
note 155, at 367 (stating that LLPs "are appropriate for different types of firms for transaction cost
orregulatory reasons"); Richards, supranote 12, at 308-09 (claiming LLPs eliminate the unfairness
of unlimited personal liability that partners were subject to in traditional partnership agreements).
"6SeeLubarofT, supranote 150, at 23.
'"See Goforth, supranote 15, at 1159.
65
See Richards, supranote 12, at 305.
'"Bergman, supranote 1, at 694.
DELAWARE JOURNAL OF CORPORATE LAW
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Scholars in opposition to the LLP believe that innocent
unsophisticated clients will be adversely affected. 67 It can be argued that
attorneys, and not the client or consumer, should bear the real economic cost
of their business. 6 ' This is because attorneys are in a better position to
prevent malpractice from occurring in the future, so it is most efficient for
attorneys to bear the financial risk.169
In addition to asserting their own position, opponents of LLPs have
vigorously attacked proponents' attempts to support LLPs.170 In particular,
they address the concern over the fundamental unfairness in allowing
unlimited personal liability for innocent partners in the multi-office large
firm environment. 7 1 One commentator points out that not all LLPs are
large, indicating that it is not impossible to effectively monitor the activity
of fellow partners in today's firm environment." Interestingly, the author
also asserts that if large firms are unable to effectively monitor the activity
of its attorneys to such a degree that the partners feel comfortable with the
notion of unlimited personal lability, then perhaps the existence of those
firms contravene public policy." Thus, these firms should be eliminated
altogether and the partners should not be seen as sympathetic victims.174
Furthermore, the resources of large firms may actually make it easier to
monitor attorney activity. 7 '
67
For instance, one such scholar writes:
There is a wide gulf... between the theoretical model used by law and
economics scholars in which all persons are sophisticated and the real world
in which we live where most individuals may not even know what a default
rule is, much less that it might be in their interest to seek to negotiate a special
deal to change it in the unlikely event that something unexpected happens.
Hamilton, supranote 76, at 1094. Another scholar writes:
While it is true that in most cases sophisticated contract claimants can protect
themselves from the risk ofpartnership default by having individual parlners
execute guarantees of performance or agreements to assume liability in the
event ofdefault, the real problem is with unsophisticated, smaller enterprises
or clients who may do business with the LLP.
Goforth, supra note 15, at 1186.
" See Murphy, supra note 11, at 230.
9
See id. at 223-28.
"6
'70See in.fra text accompanying notes 171-73.
"'See infra text accompanying notes 172-73.
"Murphy, supranote 11, at 221.
3Id.
174Id.
175Id
1999]
LiM.TED LIABILITY PARTNERSHIP
I1. DELAWARE'S LLP STATUTE
In August of 1993, following a very brief approval process, Delaware
became the third state to enact an LLP statute. 76 The Delaware statute did
not place any restrictions on the use of LLPs by nonprofessional firms, as
some states have done. 1" It did, however, make the use of LLPs by
attorneys subject to approval by the Delaware Supreme Court.'7 8 In
Delaware, attorneys have always been restricted by the Delaware Supreme
Court Rules to practicing law in specific business forms. 7 9 In the spring of
1997 the Rules were amended to permit attorneys to practice law in
Delaware under the LLP form.' 80
A. Provisionsof the Delaware LLP Statute
In Delaware, an LLP is formed by filing an application with the Office
of the Secretary of State.' The application must be executed by a "majority
in interest of the partners or by [one] or more partners authorized to execute
an application"" and must include the name of the partnership, the address
of its principal office, and "a brief statement of the business in which the
partnership engages. ' The application must also be accompanied by a
76
' Smith, supranote 149, at 2. The "big six" accounting firms were a major force driving
the initiation of LLP legislation in Delaware, and in 1994, three of the "big six" firms decided to
become LLPs under Delaware law. See Hamilton, supranote 76, at 1066-67; Mallen, supra note
77, at 995.
'77See DEL. CODE ANN. tit. 6, ch. 15 (Supp. 1998).
"7DEL.CODEANN. tit. 6, § 1515(d) (Supp. 1998). "The ability of an attorney-at-law,
admitted to the practice of law in Delaware, to practice law in a registered limited liability
partnership, shall be determined by the Rules of the Supreme Court of this State." Id According
to one legal author, "this caveat reflect[ed] [the] apparent tendency among lawmakers to be very
careful when it comes to lessening the load of legal practitioners." Smith, supranote 149, at 2.
179See DEL. Cr. CODE OF PROFESSiONAL RsPoNsmiUrrY RULE 67 (1999).
l"This amendment became effective May 1, 1997. Id.
"'DEL. CODE ANN. tit. 6, § 1544(a) (Supp. 1998). Foreign registered LLPs are not
required to register with the Secretary of State's Office. Id § 1547(c). Foreign registered LLP law
firms, however, must register with the Delaware Supreme Court. The following out-of-state firms
with Delaware branch offices have registered in this manner. McCarter & English of New Jersey;
Skadden, Arps, Slate, Meagher & Flom of New York; Blank, Rome, Comisky & McCauley of
Philadelphia; Duane, Morris & Heckscher of Philadelphia; Klehr, Harrison, Harvey, Branzburg &
Ellers of Philadelphia; Pepper Hamilton of Philadelphia; Saul, Ewing, Remick & Saul of
Philadelphia; and Wolt; Block, Schorr & Solis-Cohen ofPhiladelphia. Martindale-Hubbel Lawyer
Locator (visited Aug. 8, 1998) <http://lawyers.martindale.com.marh>.
' 2DEL. CODE ANN. tit. 6, § 1544(b) (Supp. 1998).
1-Ia § 1544(a).
DELAWARE JOURNAL OF CORPORATE LAW
[Vol. 24
registration fee of $100 for each partner. 8" In addition, the partnership name
must contain the words "Registered Limited Liability Partnership" or the
abbreviation "L.L.P."'85 Registration is good for one year and may be
renewed by the filing of an application for renewal.'86
Delaware's LLP statute also contains a minimum insurance
requirement.8 7 A Delaware LLP must either carry at least $1 million of
liability insurance "of a kind that is designed to cover the kinds of
negligence, wrongful acts, and misconduct for which liability is limited,"'8
or show that it has set aside the same amount of funds for the purpose of
satisfying of judgments against the partnership.'
With regard to liability protection, Delaware is a full shield
jurisdiction 90 and provides protection typical of second generation
A partner in a registered Delaware LLP is free of personal
statutes."
liability for "any debt, obligation or other liability of or chargeable to the
partnership... whether arising in contract, tort or otherwise" as long as that
partner was not personally negligent or the supervisor of someone who was
personally negligent.'" This liability protection further extends to any
potential indirect liability "by way of indemnification, contribution,
assessment or otherwise."'1"e Thus, partners in a Delaware LLP will not be
held personally liable, nor will they be forced to contribute to the
partnership, for the malpractice actions of their colleagues as long as they
were not personally involved. 94 Furthermore, partners will not be
personally liable for the ordinary business obligations of the firm, such as
leases and guarantees.'95
'Id § 1544(c). Under the 1997 amendment to § 1544(c), "in no event shall the fee
payable for any year with respect to a registered limited liability partnership under this section be
more than $120,000." Id.
'I85 d. § 1545.
"DEL. CODEANN. tit. 6, § 1544(e) (Supp. 1998).
'7Id. § 1546(a).
188ld.
1MId. § 1546(d).
19"See DEL. CODE ANN. tit.6, § 1515(b) (Supp. 1998).
..See supratext accompanying notes 133-37.
"DEL. CODEANN. tit. 6, § 1515(b) (Supp. 1998).
tId. See also Hamilton, supra note 76, at 1077-78 (describing contribution and
indemnification claims).
"For a discussion of what constitutes "direct supervision and control," see infra Part
I.B.1. 9
I SDEL. CODE ANN. tit. 6, § 1515(b) (Supp. 1998).
LIMITED LIABILr PARTNERSHIP
1999]
B. Issues Unresolved Under the DelawareStatute
Several important issues regarding aspects of liability protection
remain unresolved under Delaware's LLP statute.
1. Supervisor Liability
The Delaware statute states that partners of an LLP remain personally
liable for the negligence or misconduct of those under their "direct
supervision and control."'" Under this standard, a plaintiff need not.
establish that a partner was somehow negligent in his or her supervision, but
only that a partner was exercising a supervisory role when the negligent act
or misconduct occurred.1 7
This begs the question as to what constitutes "direct supervision and
control." Is the mere fact that a partner was ultimately responsible for a
certain client case or a specific matter sufficient to create unlimited personal
liability? Probably not. A court applying basic common law agency and
control principles would almost definitely require some form of intimate
involvement with the conduct in question before imposing vicarious liability.
For example, while an executive committee of a medium to large LLP firm
exercises supervision and control over the general business and operation of
the firm, such supervision and control will most likely not be "direct"
enough to expose such partners to personal liability!" Conversely, partners
who supervise the day-to-day activities of one or more attorneys on a matter,
would certainly fall within the bounds of the statutory language.' 99
2. Prior Contractual Obligations and Misconduct
The next uncertainty is whether partners of a Delaware LLP will
remain personally liable for prior misconduct or pre-existing contractual
obligations. The Delaware statute states that partners in an LLP are not
liable "for any debt, obligation or other liability of or chargeable to the
partnership or another partner or partners, whether arising in contract, tort
or otherwise, while the partnership is a registered limited liability
partnership."'" This language creates an issue, however, as to whether
'"See id.
197d.
1
nLubaroff, supra note 150, at 25.
199d.
2°DEL. CODEANN. tit. 6, § 1515(b) (Supp. 1998) (emphasis added).
DELAWARE JOURNAL OF CORPORATE LAW
[Vol. 24
partners in a Delaware LLP remain exposed to personal liability for
obligations arising prior to the finn's registration as an LLP.
Take, for example, the situation where a general partnership enters
into a commercial lease in 1990. The partnership registers as a Delaware
LLP in 1997, and then defaults on the lease the following year. The landlord
now wishes to hold the partners in the LLP personally liable. Would
partners in this LLP be potentially exposed to personal liability for the firms
contractual obligations? Probably yes. For public policy reasons, a court
would likely hold that partners in a Delaware LLP remain exposed to
personal liability for all pre-existing obligations.20 1 To hold otherwise would
adversely affect creditors and would seem fundamentally unjust.
Some states, most notably Minnesota, have adopted language that
makes it clear that partners in an LLP only receive protection from those
partnership obligations incurred after the partnership registers as an LLP. 2
To truly avoid any ambiguity on this issue the Delaware General Assembly
should, and most likely will amend Chapter 15 to include language similar
to that of the Minnesota LLP statute.
3. Sufficient Notice
A third issue that remains unresolved is the type of notice that must
be given to clients and creditors when a general partnership converts to an
LLP. Although there is no case law directly on point, there is some case law
pertaining to general partnerships that convert to corporations.2 3 The
general consensus in these cases is that in order to receive the typical
protection from personal liability that comes with the corporate form, the
newly formed entity must provide adequate notice to all clients and creditors
that they are no longer dealing with a general partnership.2"' It would
follow, therefore, that a general partnership that converts to a Delaware LLP
must give similar notice to its clients and creditors. But what constitutes
'Goforth, supranote 15, at 1184. "Numerouspublic policy arguments can be made that
it would be unfair to allow partners in an LLP to cut off the personal liability on which creditors...
may have relied. Moreover, it may violate principles of freedom ofcontract if the LLP legislation
is interpreted as retroactively changing the terms of[a] pre-existing contract." Id. at 1183.
'A partner is not personally liable for obligations "incurred while the partnership is a
limited liability partnership." MiNN.STAT.ANN. § 323A.3-06 (West Supp. 1998). The statute goes
on to clarify that "[a]ll debts and obligations under or relating to anote, contract, or other agreement
are incurred when the note, contract, or other agreement is entered into." Id.
03
2 See, e.g., Conner v. Steel, Inc., 470 P.2d 71 (Colo. Ct. App. 1970); Hill & Co. v.
O'Malley, 817 P.2d 660 (Kan. CL App. 1991); Guynn v. Brondum, 63 So.2d 821 (Miss. 1953);
Horizon Hobby Distribs. v. Gurriero, 613 N.Y.S.2d 550 (N.Y. Sup. Ct. 1994); Mulkey v. Anglin,
25 P.2d 778 (Okla. 1933); Philip Lithographing Co. v. Babich, 135 N.W.2d 343 (Wis. 1965).
-°PhilipLithographing,135 N.W.2d at 344.
1999]
LIMITED LIABILrTY PARTNERSHIP
adequate notice? In several cases, the addition of "Inc." to a new entity's
name was not sufficient notice to a creditor.20 5 Similarly, in other cases, the
filing of a certificate of assumed name2' or even a certificate of
incorporation 2° was also deemed insufficient to put a pre-existing creditor
on notice. In light of these holdings, the safe thing for law firms to do would
be to write a letter to their clients and creditors briefly explaining the firm's
change to LLP status and how this change affects the personal liability ofthe
partners.
208
C. Concerns
Critics of the LLP form caution firms against acting hastily in
adopting LLP status, arguing that it may not be as beneficial as it first
seems.? Many are particularly wary of the relative newness and uncertainty
of the entity.210 They believe that firms should not switch until any
unforeseen ambiguities that may arise are resolved. 2 1 In particular, critics
cite ambiguities over the scope of supervisory liability under the LLP
statute. 212
Ambiguities are not likely to exist, however, and even ifthey do arise,
they are unlikely to adversely affect the partners ofthe LLP. Although LLPs
have yet to be tested in court, LLPs still have the body of partnership law to
rely upon.21 3 Even in situations where the LLP statute may be unclear, as in
the area of supervisor liability,21 4 a look at common law principles should
make it possible to determine the basic standard to be imposed.2 5 Even in
a "worst case scenario," for example, where a court construes "direct
supervision and control" in a very liberal manner, the LLP form still offers
undeniably greater protection than the general partnership.
-Conner, 470 P.2d at 73; Hill & Co., 817 P.2d at 663; Guynn, 63 So.2d at 823; Philip
Lithographing,135 N.W.2d at 345.
2"Horizon Hobby Distribs., 613 N.Y.S.2d at 551.
'-2Mulkey, 25 P.2d at 780.
'nFor an examination of a clients likely reaction to such a letter, see infranotes 216-18
and accompanying text.
'See generallyMurphy, supra note 11 (discussing the cost to society posed by the LUP).
2"1Id. at 202.
21See Oved, supranote 162, at 41 (discussing various points of uncertainty).
2'See supraPart II.B.1. "it is not hard to imagine that anyone seeking to formulate a
claim against an LLP would argue for as broad a definition" as possible. Oved, supranote 162, at
41.
2"See supra text accompanying note 118.
2"See supra Part III.B.I.
2
1Ija
DELAWARE JOURNAL OF CORPORATE LAW[
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Another concern is how clients will react to a law firm attempting to
shield its partners from personal liability, and whether public relations
problems are likely to ensue. 1 6 Although common sense dictates that this
may be a potential problem, one author disagrees, stating that many firms
that have adopted the LLP have had little or no problem with client
disapproval.217 According to this author, most clients are not aware of the
substantive difference between the various business entities; and the clients
who are usually react favorably.2 18
A third concern is that, by removing the threat of personal liability,
attorneys will be less apt to police one another's conduct, thereby causing a
potential increase in malpractice litigation. 9 LLP proponents, however,
argue that because limited liability does not protect a partner's economic
interest in the firm, it is still in every partner's best interest to prevent
malpractice to the best of his or her ability.' ° As one LLP proponent stated,
"[L]awyers who need the threat of having their bank accounts attached or
their homes auctioned before they'll care about the professional
behavior of
221
their partners can't be trusted under any circumstances. "
A final concern is that LLPs may create a conflict of interest among
firm partners by having the members of one practice group more at risk for
personal liability than others.' Some areas of the law, such as complex
corporate transactions and securities regulation, pose a heightened risk for
professional malpractice. ' Yet, it is often these same areas that are the most
financially lucrative for a law firm.' Before the advent of limited liability,
all partners shared in both the risks as well as the financial benefit of high
risk practices.'m The LLP has somewhat altered this scenario by potentially
16
' "[C]lients may
look askance at any rush by their lawyers to shield themselves behind
an LLP." Milo Geyelin, Lawyers are Moving to ProtectOwn Assets in Case ofa Suit, WALL ST.
J., Sept 2, 1994, atB3.
"'See Oved, supranote 162, at 41. Young, Conaway, Stargatt & Taylor LLP does not
expect a unfavorable reaction from their clients. Interview with Joseph M. Nicholson, supra note
8.
..8Oved, supranote 162, at 41. Clients "are used to seeing unintelligible initials after
lawyers' names.... From the clients perception, the view may be 'if my lawyer's protecting
him/herself, he/she'll probably do a good job protecting me."' Id.
..9See Murphy, supranote 11, at 215.
"0 Richards, supranote 12, at 296. Practicing in the LLP form "does not preclude the
possibility that a malpractice claim could wipe out a partners' interest in the partnership." Id
"'Smith,supranote 149, at 3.
"'Johnson,supranote 2, at 139-40.
mOved, supranote 162, at 40. The practice of law in highly regulated areas such as
securities law tends to be risky due to a combination of complexity and severe statutory penalties
for violations. Johnson, supranote 2, at 140.
' 4 Johnson, supranote 2, at 140.
22 See supratext accompanying notes 30-3 1.
1999]
LIMITED LIABELITy PARTNERsHIP
decreasing the risk of vicarious liability for the partners who do not
personally participate in high risk practice areas?6 In light of this, partners
who practice in high risk areas and who bring in more money to the firm
may expect to receive an increased share of the profits commensurate with
this increased risk. 7 Similar concerns may be raised by partners who
supervise more than others.2"
D. LLP v. Other Business FormsAvailable to DelawareAttorneys
The fact that there are several valid criticisms of the LLP does not
significantly detract from the value of the entity compared to most firms.
And, although the LLP may not be suitable for all Delaware firms, the
majority stand to benefit substantially from this entity.
1. Liability Protection and Pass-Through Taxation
The Delaware LLP essentially offers the best aspects of every
business entity combined into one? 9 It offers personal liability protection
from all entity level debts," ° while at the same time allowing pass-through
taxation." Although this is the same protection and treatment offered by an
LLC,I2 it is substantially greater with respect to all other business forms. 33
The PC does not provide any protection for the negligent actions or
misconduct of one's colleagues, as it only provides limited liability for
ordinary business obligations.? Although limited partnerships allow limited
partners to take advantage of limited liability, general partners remain
personally liable for all partnership debt. 35 General partnership, needless to
say, offers no form of liability protection. 6
'See supratext accompanying notes 191-94.
'Johnson, supranote 2, at 140.
'SSee Ribstein, supranote 155, at 330-32.
"'See infratext accompanying notes 230-42.
"°See supratext accompanying notes 190-95.
"See supratext accompanying notes 23-26.
" 2See supratext accompanying note 59.
3
See infra text accompanying notes 234-36.
'See supratext accompanying notes 49-51. In addition if a PC firm does not qualify
as an S-corporation under LR.C. § 1361(b)(1), it will not be subject to pass-through taxation. Id
2sSee supratext accompanying notes 68-70.
'See supratext accompanying notes 30-3 1.
[Vol. 24
DELAWARE JOURNAL OF CORPORATE LAW
2. Procedural and Structural Flexibility
The Delaware LLP also offers a great deal of procedural and structural
flexibility. 7 This includes significant freedom with regards to profit
sharing, as well as structural flexibility. 3 This flexibility may not be greater
than that provided by the general partnership, 9 but it is significant
compared to other forms.24 PCs are highly restricted in their manner of
profit sharing,241 and under the limited partnership form, limited partners
may not participate in control of the business.242
IV. CONCLUSION
The potential problems voiced by critics of the LLP certainly warrant
consideration by any firm that is contemplating the adoption of LLP status.
No entity is a perfect fit with every firm, and many factors should be
considered.2 3 Yet, even in light of this, LLP status will greatly benefit the
vast majority of Delaware firms that have not yet become LLPs. Texas' legal
community has been universally satisfied with the LLP structure for almost
seven years, and no complaints have been voiced." The problems cited by
critics are not only unlikely to occur on a regular basis, but also are not
relevant to, and may not even affect, most firms. Although LLP status may
not comport with the goals of all Delaware firms, the majority have nothing
to lose and a great deal to gain.
Joseph S. Naylor
23See
infra text accompanying notes 238-39.
238
See supratext accompanying notes 27-29.
391d.
"4°Seeinfra text accompanying notes 241-42.
.4 See supratext accompanying notes 41-47.
42
See text accompanying note 81.
3
1 Lubaroff, supra note 150, at 29.
'Oved, supra note 162, at 73.